These 4 Measures Indicate That Meinian Onehealth Healthcare Holdings (SZSE:002044) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Meinian Onehealth Healthcare Holdings Co., Ltd. (SZSE:002044) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Meinian Onehealth Healthcare Holdings

What Is Meinian Onehealth Healthcare Holdings's Net Debt?

As you can see below, at the end of September 2024, Meinian Onehealth Healthcare Holdings had CN¥3.90b of debt, up from CN¥3.16b a year ago. Click the image for more detail. However, it also had CN¥1.55b in cash, and so its net debt is CN¥2.35b.

How Healthy Is Meinian Onehealth Healthcare Holdings' Balance Sheet?

The latest balance sheet data shows that Meinian Onehealth Healthcare Holdings had liabilities of CN¥7.97b due within a year, and liabilities of CN¥2.62b falling due after that. Offsetting this, it had CN¥1.55b in cash and CN¥4.05b in receivables that were due within 12 months. So its liabilities total CN¥4.99b more than the combination of its cash and short-term receivables.

Of course, Meinian Onehealth Healthcare Holdings has a market capitalization of CN¥25.5b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Even though Meinian Onehealth Healthcare Holdings's debt is only 1.7, its interest cover is really very low at 1.9. This does suggest the company is paying fairly high interest rates. Either way there's no doubt the stock is using meaningful leverage. Importantly, Meinian Onehealth Healthcare Holdings grew its EBIT by 49% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Meinian Onehealth Healthcare Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Happily for any shareholders, Meinian Onehealth Healthcare Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

The good news is that Meinian Onehealth Healthcare Holdings's demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. But we must concede we find its interest cover has the opposite effect. We would also note that Healthcare industry companies like Meinian Onehealth Healthcare Holdings commonly do use debt without problems. Looking at the bigger picture, we think Meinian Onehealth Healthcare Holdings's use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Meinian Onehealth Healthcare Holdings is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.